Credit Risk in Commercial Loan Pricing

Given the amount of credit risk on currently booked loans, the discussion as to the amount of credit cost that should be assigned newly originated individual commercial loans when being priced is up for discussion.  When credit risk cost is determined in a loan pricing system, it should be based on the average expected losses on loans of a given risk level, understanding that some of the loans may migrate from higher to lower levels of risk, or vice versa.  It can probably be said that loans booked today will have less risk than loans booked in previous years simply because credit standards at most institutions have become stricter due to current economic conditions.  With that understanding, the risk rating levels assigned loans will probably be more conservative than in the past, hence the pricing on the loans will reflect this new level of thought and will be taken care of in the pricing of the loan.

 

Phill Rowley

www.hurdlegroup.com

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